Reimbursement of salaries of seconded employees is not in the nature of
Fees for Technical Services
26 September 2013
Background
Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Temasek Holdings Advisors (I) P Ltd
1(the taxpayer)
held that reimbursement of salary to a Singaporecompany for seconded employees is not Fees for Technical Service (FTS) under the Income-tax Act,1961 (the Act) or India-Singapore tax treaty (tax treaty)since the Singapore company is not rendering any
service to the taxpayer, either directly or through theseconded employees.
Further, the Tribunal held that services of the secondedemployees have been rendered in India for thetaxpayer and tax has been deducted under Section 192of the Act. Consequently, there was no requirement todeduct tax under Section 195 of the Act. Also, therewas no Service Permanent Establishment (PE) of theSingapore Company because it was not rendering anyservice to the taxpayer through seconded employees.
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1 Temasek Holdings Advisors (I) P. Ltd. v. DCIT (ITA No. 4203/Mum/2012) – Taxsutra.com
Facts of the case
The taxpayer, an Indian company, is a whollyowned subsidiary of Temasek Holding Pte Ltd(THPL) which is an Asia investment firm based atSingapore.
The taxpayer renders investment advisoryservices to THPL which includes identifying andanalysing potential investment particulars inIndia, evaluating political and economic scenariofor the investment purpose in India andmonitoring and making recommendation to THPLin respect of specified investment in India,specifically for unlisted companies.
The aforesaid services are solely provided by thetaxpayer and not by THPL for which THPL ispaying 21 percent mark-up to the taxpayer andalso reimbursement of some expenditure onactual basis.
Once it is not disputed that two persons wereseconded employees and they have been deputedto India as per the terms of secondmentagreement, then the payment of salary andreimbursement made by the taxpayer to THPLcannot be disputed.
The reimbursement of salary cannot be said to bethe income chargeable to tax under the Act andthe same cannot be subject to TDS under Section195 of the Act.
Once the services of the seconded employeeshave been rendered in India for the taxpayer, taxneeds to be withheld under Section 192, whichhas been done in this case. Consequently, therewas no need to deduct tax under Section 195 of the Act.
Even under Explanation 2 to Section 9(1)(vii) of the Act, if the consideration is chargeable under the head salary, the same will not be termed asFTS. In support of its contention the taxpayer relied on various decisions
2.
The secondment agreement creates the obligationfor the payment of salary and the liability toreimburse the same. In the case of PetroleumIndia International
3there was no issue of Section
195 or FTS. Further, the decision of the SupremeCourt in the case of Emil Webber’s
4is not
applicable to the facts of the present case.
The Madras High Court5
in the case of VerizonData Services Pvt. Ltd has not affirmed thedecision of the AAR
6. The High Court has not
expressed any view and therefore, it cannot beheld that any law has been laid down by the AARwhich has been affirmed by the High Court.
Reimb ursement of other expenditur e
All the expenditure was incurred on behalf of thetaxpayer for the Indian operation only andtherefore, the same needs to be reimbursed to theTHPL which has incurred this expenditure.
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2Abbey Business Services India Pvt. Ltd. v. DCIT [2012] 53 SOT 401
(Bang), ACIT v. CMS (I) Operations & Maintenance Co. P. Ltd. [2012] 135ITD 386 (Chen), ITO v. CMS (I) Operations & Maintenance Co. P. Ltd. (ITANo.1264/Mds./2012), ITO v. Ariba Technologies (I) Pvt. Ltd. (ITAno.616/Bang/2011), DIT v. HCL Infosystem Ltd.[2005] 274 ITR 261 (Del),HCL Infosystems Ltd [2002] 76 TTJ 505 (Del), Dolphin Drilling Ltd. v. ACIT[2009] 29 SOT 612 (Del), Cholamandalam MS General Insurance Co. Ltd. Re[2009] 309 ITR 356 (AAR), DDIT v. Tekmark Global Solutions LLC (Tekmark)[2010] 38 SOT 7 (Mum), CIT v. Karistorz Endoscopy India P. Ltd. (ITA No.13of 2008 (Del), ACIT v. Karistorz Endoscopy India P. Ltd. (ITANo.2929/Del/2009), and IDS Software Solutions (I) P Ltd. v. ITO [2009] 32SOT 25 (Bang)3
ACIT v. Petroleum India International (ITA No.8086/Mum./2003) and (C.O.No.6/Mum/2009), dated 28 September 2012)4
Emil Webber v. CIT [1993] 200 ITR 483 (SC)5Verizon Data Services Pvt Ltd v. AAR, ITO, ACIT [Writ Petition No. 14921 of
2011, dated 9 August 2011]6
Verizon Data Services Pvt Ltd [2011] 337 ITR 192 (AAR)
By virtue of secondment agreement, THPL hasseconded two of its employees to the taxpayer, to assistin rendering of investment advisory services. Further,since the said employees were on the payroll of THPL,the salary of these employees was paid by them after deducting taxes.
Key highlights of the ‘seconded agreement’ are asfollows:
Supervision, direction and control of the deputedemployees is with the taxpayer
THPL does not bear any responsibility or risk for the results produced by the work of the deputedemployees
The salary cost of the deputed employees is borneby the taxpayer and the cost of the deputed
employees is charged back by THPL to thetaxpayer on actual basis without any mark-up.
During the years under consideration, the taxpayer reimbursed the salaries of seconded employees,expenditure of seconded employees, businesspromotions, professional fees, etc, to THPL.
The Assessing Officer (AO) held that the secondmentagreements between the taxpayer and THPL areunregistered and, date and place in the agreement hasnot been mentioned. These agreements are colourabledevice with an intention to avoid tax liabilities in India.Since these payments have been made, without
deducting Tax Deducted at Source (TDS) under Section195 of the Act, the AO disallowed the expenditure under Section 40(a)(i) of the Act.
For Assessment Year (AY) 2007-08, the Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the order passed by the AO. Further, for AY 2008-09 the DisputeResolution Panel (DRP) held that the reimbursement of salary cost and other expenditure has to be treated asFTS under the tax treaty.
Issues before the Tribunal
Whether reimbursement of salary cost is treated asFTS?
Whether such reimbursement of salary and other expenditure is liable for withholding of tax?
Taxpayer’s contentions
Reimbursement of salary cost
THPL had deducted the tax under Section 192 of the Act when they paid salary to employees and the samehas been deposited in India. Once the tax has beendeducted on the salary, again there was no requirementto deduct tax on account of reimbursement of suchsalary.
Relying on the decision of Siemens Akeiongesellschaft7
it was contended that reimbursement of expenditurecannot constitute income and no tax was required to bededucted under Section 195 of the Act. Further, thedecision of the Supreme Court in the case of
Kanchanganga Sea Food8
is not applicable to the factsof the present case.
Tax department’s contentions
In the absence of any employee-employer relationshipbetween the taxpayer and the seconded employees,the taxpayer does not have any liability to pay thesalary to these employees and therefore, there was noquestion of reimbursement. The payment was FTSunder the Act and also under the tax treaty. However, if it is not a salary or FTS then there was a Service PE,hence the payment was to be taxed in India.
On reference to the appointment letter of both theemployees, it was contended that the privity of contractis between the THPL and the employee and the right of termination also lies with the THPL. In support of itscontention the tax department relied on the decision of Petroleum India International.
The nature of duties has not been mentioned in thesecondment agreement and on a perusal of Form 16 of the two employees, it indicates that the allocation of salary and the purpose the reimbursement was notclear.
The tax department relied on the decision of the AAR inthe case of Verizon Data Service India Pvt. Ltd. Further,the tax department also relied on various AAR rulings
9
where it has been held that payments made inpursuance of secondment agreement cannot be held tobe reimbursement of expenditure and withholding of taxunder Section 195 of the Act was required on suchpayment.
Reference to Explanation 2 to Section 9(1)(vii) of the Act indicates that managerial and consultancy servicesare treated as FTS. The services provided by secondedemployees are in the nature of advisory and managerialservice.
The phrase ‘including the provisions of service of technical or other personnel’ in Explanation 2 to Section9(1)(vii) of the Act, is meant for the employees sent torender service only. This will include the secondedemployees because it is through these personnel, theservices have been rendered and therefore, thepayments are FTS.
__________________ 7
CIT v. Siemens Akeiongesellschaft [2009] 310 ITR 320 (Bom)8Kanchanganga Sea Foods Ltd v. CIT [2010] 325 ITR 540 (SC)
9Centrica India Offshore Pvt. Ltd v. CIT (AAR No. 856/2010)
AT&S India Pvt. Ltd (AAR No.670/2005)Danfoss Industries Pvt. Ltd. v. CIT (AAR No.606/2002)
Relying on various rulings10
, the tax departmentcontended that the payment is also taxable under
Article 12(4)(b) of the tax treaty since these twopersons are making available the expertise to thetaxpayer.
These two employees were sent by the THPL towork in India with the taxpayer and the employeeshave rendered services on behalf of the THPL.Therefore, this is a case of a Service PE and thepayment was made on account of the services andnot the salary. The taxpayer relied upon the AARruling in the case of Centrica India Offshore Pvt.Ltd.
The Transfer Pricing Officer (TPO) is not supposedto look into the other nature of transactions or reimbursement of expenditure since before him,
the matter is whether the international transactionsundertaken by the AE are at arm’s length or not.
Tribunal’s ruling
Reimburs ement of salary
An agreement between the two parties need notnecessarily be registered as there is no provisionunder the law which provides that suchsecondment agreement needs to be registered or any approval from the Government of India isrequired.
The signed secondment agreement was duly filedand in which the date has already been mentionedin the operating part of the agreement. Accordingly,the secondment agreement cannot be held to be acolourable device.
Even if the relationship between the taxpayer andthe THPL is that of an independent contractor andreimbursement of salary is a contractual payment,there is no requirement to deduct tax since theTHPL has paid the salary after withholding of taxunder Section 192 of the Act.
The taxpayer was not a beneficiary of theexpenditure because the seconded employeeshave been paid salary by THPL who are working inIndia for the taxpayer and the taxpayer is merelyreimbursing the same.
By rendering service to THPL, the taxpayer is earningbusiness income and salary paid is a businessexpenditure on which tax has already been deductedby THPL since the liability to withhold the tax on
salary falls within the purview of Section 192 of the Act. There cannot be a double deduction of tax - onceat the time of payment of the salary and again on thereimbursement.
The decision of the AAR in the case of Verizon DataService India Pvt. Ltd. is not applicable to the facts of the present case since in that case the secondedemployees of US Company were rendering servicesin India and those services were rendered onlythrough the Indian company. Whereas, in the presentcase the taxpayer is rendering service to THPL on amark-up basis and THPL was not rendering any
service in India through the taxpayer. Further, theMadras High Court had dismissed the Writ Petitionfiled by the taxpayer against this AAR ruling and noopinion has been given by the High Court which haspersuasive value in the present case.
The decision of Danfoss Industries Pvt Ltd11
was notapplicable to the facts of the present case. Further,THPL is not rendering any service to the taxpayer andseconded employees are working for the taxpayer.
Accordingly, managerial or consultancy services werenot rendered by THPL either directly or through theseconded employees. Hence, provisions of Section9(1)(vii) of the Act do not apply.
Further, such reimbursement is not taxable under Article 12(4) of the tax treaty since the THPL isneither rendering any services to the taxpayer nor they are making available any kind of technicalknowledge, experience, skill or process to the Indiancompany.
The Service PE would exist only when THPL isrendering services in India through its secondedemployees. However, in the present case THPL is notrendering any service to the taxpayer throughseconded employees.
Accordingly, on the reimbursement of salary,reimbursement of expenditure, expenditure relating toinformation technology and business promotion,withholding of tax was not required and therefore,there would be no disallowance under Section 40(a)(i)of the Act.
The expenditure relating to seconded employeessuch as meals, travelling, training, etc, was not
liable for TDS under the Act. Further, businesspromotion expenditure and information technologyexpenditure are also not liable for TDS since theyare neither for technical services nor for anyprofessional services. The Supreme Court’sdecision in the case of Kanchanganga Sea Foodis not applicable to the facts of the present case.
In the case of professional fees, the expenditureshave been incurred for the purpose of thetaxpayer in India and these payments were madeby the THPL which has been reimbursed by thetaxpayer. TDS provisions are attracted to thepayment for professional services and it does notmake any difference whether the payment wasmade by THPL and reimbursed by the taxpayer.
Our comments
Taxation of reimbursement to the foreign companies,pursuant to secondment contracts has been a subjectmatter of litigation before the courts from a long time.The Indian tax authorities have been contending thatby sending employees to India, the foreign entities areactually rendering services to the Indian companies or carrying out business in India in the form of a PE inIndia.
In the present case, the Tribunal held that theSingapore Company had nothing to do with theseconded employees except for paying their salary.The Indian company was the economic employer of the seconded employees. Further the employees wererendering services purely for the Indian company.
Accordingly, the reimbursements were purely in theform of salary from which tax was duly deducted anddeposited by the Indian company hence no further taxwithholding was required.
Recently, the Mumbai Tribunal in the case of Mark &Spencer Reliance India P. Ltd
12held that merely
providing employees or assisting the taxpayer in thebusiness and in the area of consultancy,management, etc. would not constitute ‘makeavailable’ of the services of any technical or consultancy in nature under the India-UK tax treaty.The Tribunal held that since the amount of salaryreceived by taxpayer’s personnel had been subjectedto tax in India, there was no default in deduction of taxon the part of the taxpayer.
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12Mark & Spencer Reliance India P. Ltd. (ITA No. 905/M/2012) –
Note: - The present ruling has dealt with various issues,however, this flash news has been prepared on the issue of thereimbursement of salary and other costs.
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